Book Review – Too Big To Fail By Andrew Sorkin

I tackled the book “Too Big To Fail” this week. Andrew Sorkin delivered a thorough blow-by-blow account of the 2008 financial crisis that is the definition of “insider’s view.” The only book I could think to compare it to would be, “Game Change” by Mark Halperin and John Heilemann. Sorkin starts with the aftermath of the mini-crash of Fanne Mae and Freddie Mac, as well as Bear Stearns. He tracks the downfall of Lehman Brothers from start to finish, and we get to see this very small, elite circle of financial giants try and avert disaster (and some would argue they succeed).

Detailed or Tedious?

If you don’t have the stomach for plenty of financial details, this book definitely isn’t for you. The personal communication between power players and the sheer amount of raw financial talk might be too much for some readers. Sorkin does a great job of showing the human component of the story, and breaking the themes down for a novice like myself, but there are only a few people I know who I would recommend the book to. That being said, the level of reporting is absolutely top-notch, and I learned a ton of interesting things about how decisions are actually made at the top of the financial food chain. I have to assume the majority of the details are fairly accurate given that I haven’t heard any huge outcries or lawsuits from the people involved since the book was released.

Not Evil… Just Really Greedy and Dumb

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Too Big To Fail’s inside look at these titans of Wall Street reveals a lot that I don’t think the majority of people are aware of. It was refreshing for me to see that they did genuinely feel terrible for screwing employees and shareholders over as well as losing a large amount of their own wealth. The accounts of meetings where they tried to put aside rivalries in order save the system seemed like genuine attempts to work very hard to do the right thing. It was also good to know that some of the failure was not a complete shock to Paulson and Geithner, and that they were trying to address these issues before the roof caved in (something I was not aware of). The major hit that the Wall Street reputation takes in this book (among others I’ve read recently) is that they really have no idea what the hell they are doing with the whole derivative and credit default swap industry. I’m more convinced than ever that these financial vehicles are no more than gambling chips, and provide no real value for the economy. The complete lack of consideration for leverage and risk amongst the top tier bankers was also unnerving, but we kind of knew about that from reading the headlines at the time.

Who Knew Jim Cramer Had Such Insight?

There were a few interesting tidbits that stuck out to me in a very geeky finance sort of way. The first was the incredible power of hedge funds and their ability to short stocks while circulating rumors that severely hurt companies. That whole world of backstabbing is crazy. We had investment banks that were backing hedge funds that were shorting the very mortgage derivatives they were selling! Those same funds were also dragging down Lehman Brothers, which then triggered a huge earthquake that would have taken down their parent companies if not for intervention. I have nowhere near the expertise to suggest how these guys should be regulated, but it seems pretty crazy how much power they appear to wield (at the same time, can anyone blame them for shorting banks that were sitting on toxic debt? Isn’t this the definition of the free market at work?).

Globalization – Good or Bad?

Another theme that is central to Sorkin’s narrative is the idea of how interconnected the world’s banking system actually is now. I knew in my head that when something really bad happens in Japan or Europe that it will have some effects over in North America, but I never realized the extent of the destruction that would have occurred if AIG would have been allowed to collapse. Although Lehman brothers was focused on far more in the book, AIG was really the linchpin of the whole bailout. At different points, several of the brightest minds in the world today ruminate on if this whole interconnected financial web that we have is really a good thing. It was created in order to lessen risk all around the world, but many people smarter than me hypothesize that it may actually increase systemic risk, especially when you factor in the aforementioned “hedgies” that can make billions spreading rumors and shorting the market (look at the Europe debt contagion for Exhibit A of this theory).

Buffett Is Da Man!

Finally, the legend of Warren Buffett only grew in my mind as I read the book. At several points in the book, various financial institutions with toxic default swaps, and crazy derivative-riddled balance sheets try to interest Buffett in bailing them out. Basically Buffett takes one look at their business model and says there are too many questions, he’s out. He then goes on to say that he is very sceptical of the whole investment bank structure, and that he doesn’t really trust Wall Street (somewhat of note since he kind of bailed out Bank of America recently). I absolutely love this guy, and how he operates. The idea of investing in companies that you can understand and are undervalued will never get old! I don’t know why we don’t just take this guys’ advice on everything, he has such a proven track record, and lives his life as such a role model, that he is almost without peer at this point (save for his buddy Charlie Munger).

Interesting To Note…

The afterword is one of the best parts of the book, and it is thought-provoking to look back on 2008. One number Sorkin reports that I was not aware of is that the vast majority of TARP money has actually been paid back to the government. Overall, before reading the book I had a very negative view of the bailouts (I’m a true free market guy that was in the “moral hazard” camp), but it is tough to deny that looks like the right decision in hindsight. That being said, Sorkin identifies the major danger going forward – the financial “wizards” that survived the catastrophe likely now feel invincible, and now they know for a fact that they are literally too big for the government to let them fail. When you combine that with the success lobbyists have had in limiting regulations within the industry, I find it utterly remarkable that despite Paulson’s sleepless nights and best efforts, we may not have learned much at all. Click the picture below to take a look at it on Amazon.

I don’t mind a few number and stats, but I don’t like getting bogged down in them. I think it is important though to understand the factors surrounding the GFC, it had a pretty big impact on me a one stage. Completely agree about Warren Buffett, he is definitely a worthy role model.

This book is on my list. Interesting also how GS was betting against CDS while pushing them on it’s customers. GS knew what was going on and profited immensely! The taxpayers are still buying back these toxic assets from banks while the investment bankers that were paid millions are sipping scotch in the Hamptons!

I’m not a big fan of regulation, but those guys at the banks do not act logically (as the old “invisible hand” theory assumes), because they know they will be bailed out. We should have given short jail sentences to a few of these guys in exchange for the bailout to remove some of the moral hazard.

That’s just the thing, even if regulation got some teeth (which it won’t) those guys have still made out like bandits. I’m not sure I could live with myself if I had made the decisions they did, but I’m sure the $1000-a-bottle stuff helps. If I lived in the states I would refuse to bank with those big banks, both as a moral statement and a financial choice (a bank run is not out of the question when leverage continues to be so high).

I haven’t read this book yet but I have heard good things. I think like with everything, a balance is needed. Some regulation is good to keep things balanced but if you put in too much or not enough things get out of whack.

It seems balance with anything these days is an issue in the society we live in.

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7 years ago

Ron

It is interesting to see what is continuing to happen today. With the robo signing in the mortgage industry it seems like the financial system is just reverting back to its’ old ways.

This is one I’ve put off getting. There are times I wish the US hadn’t repealed Glass-Steagall opening the opportunity for these banks to get into derivatives in the first place. Toss into the fray the removal of the uptick rule in ’07. This only made it easier for hedge funds to drive the bank stocks down. It all seemed to workout into a perfect little storm for anyone wanting to short anything.